Kevin Drum - December 2012

“We tried to get the president to do it last year. We now have another opportunity here at the end of the year to try to engage that discussion again. We’ll have another opportunity later, when the debt ceiling issue arrives.”

....I asked McConnell whether Dems’ unity on this point will leave Republicans isolated if they attempt to use U.S. creditworthiness as a bargaining chip to secure cuts to major social insurance programs. “I think I can speak for every single Republican that we think a request of any president to raise the debt ceiling in the future should involve a discussion with whoever the president is about what we might do about the debt,” he said. “And we shouldn’t treat it like a Motherhood Resolution; that we shouldn’t airdrop it into Obamacare with no vote; that the decision to raise the debt ceiling is a perfect time to have a discussion about the debt.”

There are two peculiar things about all this. The first is the obvious one: Republicans are quite plainly scared to death of entitlement reform. They're happy to vote unanimously for symbolic bills like the Ryan budget because they know no one really takes them seriously. But if you ask them to put real, concrete cuts to Medicare and Social Security on the table, they tentatively suggest a couple of smallish items (raising the retirement age, adopting chained CPI) and then back off. The reason for this is pretty obvious: they know that long-term cuts won't affect the current deficit, while short-term cuts will provoke an angry backlash among seniors. And they can't afford that backlash since seniors make up a big chunk of their base.

There's nothing mysterious about this. It's the usual reason that entitlement reform is hard. Still, what is McConnell expecting? That if Republicans put enough pressure on Obama he'll eventually propose big cuts of his own? That doesn't even make sense. Surely McConnell knows that if Republicans really want to slash Medicare and Social Security, they're going to have to put their own proposals on the table. Obama simply has no incentive to do it himself.

The second peculiar thing about all this is also pretty obvious: why the obsession with the debt ceiling? It's an unusually reckless bit of extortion that opens up Republicans to legitimate scorn, but it's not really necessary. If Republicans want to fight over spending, they can instead fight over the budget. That would lead to a government shutdown a la 1995, followed by a deal of some kind. The pressure this puts on Obama is similar, but it's far more defensible. Republicans aren't refusing to pay their own bills and they aren't recklessly putting the creditworthiness of the United States at risk. So why not have this fight over the budget rather than the debt ceiling?

I suppose there are good answers to these questions, but I haven't seen them even though, as I said, they're both pretty obvious. Where's Politico when you need them?

It's kind of important to understand that this total hostility to the labor movement—the kind of thing that makes it unremarkable when a Nikki Haley flatly tells unions (who are still, so far as I know, legal everywhere) to stay out of her state as though they were crime rings—is relatively new, and very new outside the Deep South....Lest we forget, in 1976, The Sainted One Himself, Ronald Reagan, chose a man (Sen. Richard Schweiker of Pennsylvania) with a 91% voting rating from the AFL-CIO's Committee on Political Education to be his pre-convention running-mate. Yes, this was an audacious move designed to create a mind-bending ideological coalition ticket between opposite wings of the GOP, but the point is there was a pro-labor wing of the GOP that people like Reagan not only had to respect but actually wanted to pull into their tent.

I'm loathe to argue a point of political history with Ed, but I don't think this is quite right. Yes, there was a union-friendly wing of the Republican Party at one time, but that went through a major upheaval in the 70s, and by the time Reagan took office Republicans were pretty uniformly dedicated to destroying labor one brick at a time. And they did.

I think the only thing that's changed recently is that labor passed a tipping point. In the private sector, labor density dropped below 8 percent about a decade ago, and at that point it became so tiny that Republicans simply didn't need to show it any deference anymore. So in 2010, when a tea-partyized GOP took over total control of a bunch of state legislatures, they felt free to go after unions in the most public possible way without fear of paying a political price. Besides, they had already done just about everything they possibly could to weaken unions short of destroying them completely. Their current anti-union efforts were just the obvious next step.

By 1978, a chastened union movement had already given up on big-ticket legislation to make it easier to organize workplaces. But they still had every reason to think they could at least win passage of a modest package to bolster existing labor law and increase penalties for flouting rulings of the National Labor Relations Board. After all, a Democrat was president, and Democrats held 61 seats in the Senate. So they threw their support behind a compromise bill they thought the business community would accept with only a pro forma fight.

Instead, the Business Roundtable, the US Chamber of Commerce, and other business groups declared war. Organized labor fought back with all it had—but that was no longer enough: The bill failed in the Senate by two votes. It was, said right-wing Sen. Orrin Hatch (R-Utah), "a starting point for a new era of assertiveness by big business in Washington." Business historian Kim McQuaid put it more bluntly: 1978, he said, was "Waterloo" for unions.

What's happening now is the logical endpoint of a game that started a long time ago. The only thing new is that unions are now so weak that Republicans feel no need to wear even a thin mask of faux respect for labor anymore. Several decades ago the business wing of the party set out to destroy unions, and they're now close enough to total victory that they can smell it.

Earlier today I was wondering when the business community would start seriously pressing Republicans to agree to tax increases in order to avoid a new recession caused by either the fiscal cliff or another debt ceiling standoff. Tonight, the New York Times reports that the pressure has started:

A broad swath of the nation’s leading chief executives dropped its opposition to tax increases on the wealthiest Americans on Tuesday, while the White House quietly pressed Wall Street titans for their support as well.

Before Tuesday’s about-face, the Business Roundtable had insisted that the White House extend Bush-era tax cuts to taxpayers of all income brackets, but the executives’ resistance crumbled as pressure builds to find a compromise for the fiscal impasse in Washington before the end of the year. “We recognize that part of the solution has to be tax increases,” David M. Cote, chief executive of Honeywell, said on a conference call with reporters. “That’s the only thing that allows a reasonable compromise to be reached.”

The Business Roundtable isn't a center-right organization. It's a pretty central player in movement conservatism. The fact that they're publicly urging Congress to accept higher revenue—"whether by increasing rates, eliminating deductions, or some combination thereof"—is a significant step.

And the Wall Street Journal reports that there are signs of progress on a deal. They say that Obama has lowered his tax target from $1.6 trillion to $1.4 trillion, while John Boehner has produced a counteroffer that's slightly different from last week's proposal. In addition, the White House has put corporate tax reform on the table as an extra bargaining chip.

If I had to bet, I'd bet that we're not going to see a deal before January 1. But you never know. Once the dam breaks, it's possible that we could reach agreement pretty quickly.

[Chris Wallace] pointed out that Schumer is insisting that Republicans make concessions on taxes — that is, that Republicans should “negotiate against themselves” — yet that it is unacceptable for Democrats to do so. Once we get our revenues, we will start “negotiating.” The trouble, of course, is that congressional Republicans will have conceded most of what they can concede, short of waging another battle over the debt limit, to nudge congressional Democrats toward embracing structural entitlement reform. And were congressional Republicans to wage another battle over the debt limit, one assumes that congressional Democrats would characterize Republicans as extremists in need of being taught yet another lesson. It’s all very neat.

I guess that would be neat, if it were true. But no one is suggesting that Republicans have to preemptively cave in on taxes and only then will we begin discussing spending cuts. It's a negotiation. President Obama has produced a detailed opening offer that includes about $1.6 trillion in tax increases and $400 billion in spending cuts beyond the $1.5 trillion agreed to last year. Republicans didn't like it. That's no surprise. The next step, then, is to hear the Republican counteroffer. So far, though, we've heard only crickets.

I'm stumped about what conservatives expect here. Now that Republicans have rejected Obama's proposal, do they think he should simply come up with another one? And when they say no again, yet another one? Then another. And another. Until, finally, they say yes? That doesn't even make sense.

If Republicans want to cut structurally reform Medicare and Social Security, they should put a proposal on the table and let CBO score each of its elements. Ditto for the president's proposal. Then they can start horsetrading. But what kind of trade can Democrats make if they don't even know what Republicans want?

I'm skeptical of any strategy that depends on convincing conservatives they need to be more reasonable.

True enough. And it's also true that any deal that doesn't include a debt ceiling increase is a waste of time. Why bother cutting a deal if Republicans are just going to pick another lever to wreck the economy with?

I continue to wait and wonder about the business community. Their self-interest is pretty clear: they should be in favor of a fiscal cliff agreement and they should be in favor of a debt ceiling agreement. Throwing the economy into the crapper is bad for business, after all. And yet, right now there's only a glimmering of evidence that business leaders are pressuring their tea-party friends to settle down, admit the need for compromise, and do a deal. So far, apparently, class loyalties are trumping fiduciary responsibilities.

Today Matt Yglesias criticizes the idea that uncertainty over the fiscal cliff is the reason big corporations are keeping their cash "on the sidelines" as they build up war chests rather than investing in business expansion:

A firm with profits must choose what to do with the money....Whenever you're making an investment decision, the fact that the future is uncertain is a real problem. But there's no particular reason to think that "uncertainty" about the future should specifically bias you in favor of low-yield highly liquid investment decisions.

Now, by contrast, something that very much could bias you in favor of low-yield highly liquid investment decisions is certainty that the inflation rate won't rise above 2 percent....Another thing that should bias you in favor of a low-yield highly liquid investment decision is skepticism about the economy's overall growth prospects. If things are going to be generally crappy, then you're not necessarily missing out on much by opting for liquidity.

That's why a real strategy for bringing corporate cash off the sidelines doesn't have anything to do with tax reform (though tax reform might be nice), it has to do with monetary policy.

In the long term, I agree. But in fairness, there's also a short term, and in the short term firms are wondering if Congress is going to throw the economy into a second recession by heading over the fiscal cliff for a protracted period. The economy is already fragile enough that companies aren't very excited about the prospects for growth, and if GDP sags further in 2013 because we can't come up with a deal, that would legitimately affect short-term decisions about business expansion.

So: a deal would be good for business. Better monetary policy would be good for business. In a reasonable world, we wouldn't be arguing about either one. That, however, is obviously not the world we live in.

The New America Foundation's website was down yesterday, so I was unable to read Steven Teles's new essay, "Kludgeocracy: The American Way of Policy." Who wouldn't want to read an essay with a great title like that? Especially if it comes from Steven Teles?

This morning the hamsters over at NAF were once again powering their servers, so I hopped over and looked through it. It's well worth a read, as Teles takes a whirlwind tour through the causes and costs of America's wildly complicated and overlapping set of tax, regulatory, and social policies. The causes are numerous, he suggests, including federalism, voter ambivalence, and, possibly most important, the fact that it benefits the rich and powerful:

Policy complexity is valuable for those seeking to extract rents from government because it muddies the waters, making it hard to see just who is benefitting and how, and so obscuring the actual mechanism of political action that it is difficult to mobilize against it. That’s why business prefers its benefits in the tax code, or in obscure regulatory advantages, rather than in straightforward handouts from the state. Politicians may posture against “corporate welfare,” but kludgeocracy makes it hard for the public to focus on the various handouts to business, and thus to effectively target their anger. The consequence is that anger diffuses onto our system of government as a whole, leading to a loss of trust and cynicism at the possibility that the public sector can be an efficient instrument of the public good.

....Kludgeocracy is also bad for liberalism by creating both the reality and image that government is incompetent and/or corrupt. The complexity of the tax code, for instance, facilitates tax cheating and creative accounting, and along with it the impression that tax compliance is actually lower than it is. Much of the legitimacy of the law, and the willingness of citizens to contribute to public goods, rests on the perception that others are doing their share. Complexity helps eat away at that perception, which is crucial to support the expansion of beneficial state activity.

The habit of finding sneaky ways to advance public goals in a political environment suspicious of government has also had a corrosive impact on liberalism. Searching for obscure mechanisms to plant public activism in rocky institutional and cultural soil, liberals have developed a habit of dishonesty and evasiveness rather than openly making the argument for a muscular role for government. This is why so few of liberalism’s successes build a platform for new rounds of reform.

I wish that Teles had come up with a more rigorous measurement of kludginess in this essay. Is American policymaking kludgier than it is in Germany or Japan, for example? After all, a fair amount of policy complexity is simply a response to the fact that modern life is complex. There's no way around that.

Still, it's a valuable essay and Teles's basic point is well worth engaging with. Corporations regularly rail against the complexity of the tax code, for example, but they're crying crocodile tears. Our statutory corporate tax rate is one of the highest in the world, but the actual tax rate that corporations pay is one of the lowest. Why? Because corporations have spent decades lobbying for a mind-boggling array of loopholes, exemptions, and changes in definitions. Likewise, Wall Street complains that the Dodd-Frank financial regulation bill is too complex, but they've spent the past couple of years trying to make it even more complex. Why? Because complexity is their friend. Simple, blunt rules are hard to evade, but complex ones have lots of escape hatches for those clever enough to find them. And make no mistake: the rocket scientists on Wall Street and the tax accountants at Fortune 500 firms are as clever as they come. So are their lawyers, who will spend the next decade getting agency rulings and court decisions locking in place all the loopholes that the rocket scientists discover.

And Teles is right that this love of complexity has affected liberal policymaking too. I'd take a guess at two basic causes. The first is a natural affinity for fairness. We want social policies to be fair, and that means (a) making sure that not a single deserving person is excluded, and (b) making sure that not a single undeserving person gets benefits they shouldn't. We're just not willing to accept 95 percent fairness anymore, and that leads us down a rabbit hole of ever increasing complexity. The second cause is that conservatives have made social policymaking so hard that it can only happen if it's hidden in the fine print, so to speak. This means accepting a second or third-best option that doesn't raise too many hackles, rather than a first-best option that might be both better and cheaper, but can never get through the legislative process.

So what's the answer? Teles has several suggestions, but ends with this:

All of the suggestions I have laid out in this last section will have only marginal effects unless policymakers come to be embarrassed to be associated with kludginess. The only viable way to do so is to increase the visibility of policy complexity’s costs, so that more publicly-spirited politicians seek to minimize them, while their more electorally-minded colleagues are made to worry about being held responsible for them. As the late Sen. Moynihan argued, what counts is what’s counted. While CBO deficit scoring powerfully influences the alternatives politicians consider, the large compliance costs associated with kludgeocracy are uncounted, and thus invisible. Requiring that CBO issue an estimate of governmental and private compliance costs along with its deficit score would reduce somewhat the incentives to lower deficit estimates by substituting more complicated alternatives.

We've built up way too many barnacles on the ship of state, and the truth is that more transparency would be good for everyone. It would be good for conservatives because it would make the costs of programs more obvious, and when taxpayers understand how much programs cost they're less excited about expanding them. But it would also be good for liberals because it would allow us to design better programs that make government more efficient, and a more efficient government with fewer corporate subsidies is one that taxpayers are more likely to support. There's more to it than just that, though, and the entire essay is worth a read

Would you like to hear a super-easy, super-quick way to make a deal on Social Security? Probably not. But I have one for you anyway. Here it is:

Chained CPI. Every year, Social Security benefits are increased to account for inflation. Many experts—and not just conservative experts—think conventional measures of CPI overstate actual inflation and suggest we should change to something called "chained CPI." This would have the effect of very slowly reducing the growth of benefits over time.

Payroll tax cap. In 1977, Congress set the maximum income subject to payroll tax so that 90 percent of all income would be taxed. Since then, however, growing income inequality has pushed more and more income to top earners. Because of this, the payroll tax cap only captures 86 percent of all income today. We should return to Congress's original intent and phase in an increase in the payroll cap so that we once again tax 90 percent of all income.

One of these options cuts benefits slightly and the other increases taxes slightly over the course of a decade or two. Their effect is nearly identical, a 1:1 balance of benefits and taxes, and together they'd extend the solvency of Social Security by another 20 years. That takes us out to about 2060 or so, and that's plenty. In 2032 we can all get back together, see how things are going, and decide if we need to do anything further.

Neither one of these options represents a real change to Social Security. Rather, they represent an effort to return Social Security to where Congress intended when it originally set tax and COLA policies in the 1970s. We could, literally, do this deal tomorrow if there were even the slightest seriousness in Washington about addressing Social Security in a reasonable way.

We don't need to "fix" Social Security forever. After all, no one ever suggests that, say, a new quadrennial plan from the Pentagon will "fix" our defense strategy forever. We should think about Social Security similarly, as something to be revisited every couple of decades, the same way the Pentagon takes a fresh look at global challenges every few years. That's the way policymaking works.

UPDATE: Adopting chained CPI would lower benefits slightly each year after retirement, and those cuts would accumulate. Thus, the very oldest and most vulnerable seniors would suffer the biggest cuts. Christian Weller suggests that we make up for this by increasing benefits by 5 percent for those over the age of 85. That sounds like a good idea to me. Alternately, since it's the poorest seniors who would be most affected by chained CPI, we could change the bend points so that wealthier seniors get lower benefits and poorer ones get higher benefits.

I guess this would mean that this is no longer the world's easiest plan to rescue Social Security, but it's still pretty easy.

Are the incentive effects of taxes genetic? Do some of us respond more strongly to tax increases than others? Probably not. But in the case of tobacco taxes, we might. Here's what a new study says:

This study used a moderated regression framework to test the association between current tobacco use and (i) CHRNA6 genotype, (ii) the logarithm of state-level tobacco tax rates and (iii) their interaction....Like previous literature, the G/G genotype is protective, as are high tobacco taxes; the interaction between CHRNA6 and tax rates showed that the effect of the tax is only present for individuals with the protective (G/G) genotype (p<.01) and absent in other individuals.

This study showed that the impact of tobacco taxation on tobacco use is moderated by individual genotype. Indeed, only individuals with the protective G/G genotype were found to respond to state level tobacco taxation rates, suggesting an important clue in understanding why the rates of tobacco use among US adults have remained stubbornly persistent during a time period of large changes in tobacco control policies during the past two decades.

So there you have it. Who knows? Maybe someday researchers will analyze Paul Ryan's DNA and discover other genes that elevate aversion to taxes in general. We could even make a TV show out of it, sort of a cross between CSI and West Wing. Science marches on.

Earlier today I wrote a post saying flatly, "We don't suffer from runaway spending." Our only long-term problems are an aging population and rising health care costs. That's it. In case you, or a conservative loved one, doesn't believe this, here's a chart I posted last year that tells the basic story of federal spending:

First off, notice that total federal spending is down—not up—from its peak during the Reagan-Bush years. More specifically, the category that contains domestic discretionary spending and miscellaneous mandatory spending ("Other") has been on a steady downward slope for decades. It spikes a bit during recessions, but that's about it.

Interest expense is also down. Defense spending swelled back up to late-80s levels after 9/11, but is otherwise down over the long term too. And Social Security spending is pretty flat, though it will go up a point or two over the next few decades before it levels out again. The only category that's on a long-term upward slope is Medicare.

In other words, we don't have a discretionary spending problem. We don't have an interest expense problem. Once we withdraw from Afghanistan we don't have a big defense spending problem. And Social Security, at worst, is a very small and very manageable problem.

Our only serious problem is Medicare, thanks to an aging population and rising health care costs. That's it. End of story. If you actually care about federal spending, that's the only thing you should be focused on. Pundits and talking heads who complain generically about "out-of-control spending" are either (a) ignorant of basic budget facts or (b) engaged in agitprop.

NOTE: This chart deliberately stops at 2008 in order to show historical trends more clearly. The numbers in the chart have spiked over the past four years because the recession has temporarily depressed GDP and temporarily increased spending, but that spike will disappear naturally as the economy recovers—just as it has after every other recession. It's not an indication of a long-term spiral in federal spending.